Narrower Volcker Favors Mutual Funds

The mutual-fund industry appeared largely unscathed from the final version of the Volcker rule, after regulators agreed to narrow provisions that could have inadvertently required banks like Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. to sell big chunks of their mutual-fund businesses.

Under the final rule, which five agencies approved Tuesday, banks are restricted from investing in certain “covered funds,” including hedge funds and private-equity funds. In a boon to the mutual-fund industry, the final language narrows the scope of “covered funds” from the 2011 proposal to exclude registered mutual funds.

The change comes at the request of the industry, which had argued Congress never intended regulators to restrict bank ownership of mutual funds.

The 2011 proposal included broader language that would have “covered” any mutual fund that entered into a single swap. Since many mutual funds enter into swaps to hedge currency and interest-rate risks, banks would not have been able to sponsor them under the original language, said attorneys tracking the rule.

Under the final regulation, banks are restricted from owning or sponsoring “private” funds open to wealthy and sophisticated investors but can own or sponsor mutual funds and other investment companies open to the general public.

Paul Schott Stevens, president and chief executive of the Investment Company Institute, a trade group for the mutual-fund industry, said in a statement “regulators appear to have heard our concerns,” though he stressed ICI is still poring over the nearly 1,000 page rule.